Jurisdiction - Hong Kong
Hong Kong – Protection Of Client Assets.

27 April, 2013


In March 2013, Hong Kong's Securities and Futures Commission (SFC) commenced legal proceedings in the High Court against five defendants in relation to allegations of misappropriation of clients' assets by two former staff of a local securities firm. The alleged misappropriation came to light during an on-site inspection by the SFC.


This mirrors a circular issued by the SFC in February 2013 reminding licensed corporations to guard against risk of client asset misappropriation and the importance of (i) putting in place adequate internal controls on administrative and settlement procedures and (ii) having management supervision over the activities of their account executives. The SFC referred to the previous circulars on this topic, dated 16 March 20108 March 2006 and 22 July 2002.


What internal controls should exist?


The recent circular pointed out several control areas that licensed firms should pay special attention to, including the establishment of controls over the generation and dispatch of client statements, "hold mail" arrangements and the use of blank client statements. There should also be controls over telephone systems and the ability of staff to access the firm's computer system.


What should senior management do?


Limited management supervision can lead staff to abuse the management's trust and take opportunities to commit fraud. The circular reminds senior management of the need to exercise adequate supervision over front and back office functions to ensure activities are subject to regular review and implement policies and procedures to prevent and detect potential fraud. There should also be strict segregation of duties between front office, middle office and back office functions.


What should firms do now?


Licensed firms should start reviewing their internal control systems and paying attention to whether senior management have exercised adequate supervision over the activities of their staff. Licensed entities are obliged to report any suspicion of client asset misappropriation to the SFC.


Although not specifically mentioned in the circular, firms should also remind their clients to be vigilant in checking their own accounts. They may wish to remind clients to check monthly statements carefully; follow up promptly if they fail to receive monthly statements; never allow account executives to trade their own transactions on client accounts; and never deposit money directly to an executive's bank account. Finally, clients should be reminded to contact the firm's complaint officer or senior management if they have any complaints or dispute on their accounts.


For further information, please contact:


Sharon Pun, Partner, Deacons


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